Here's how to keep complaints from turning into tip-off phone calls
April 14, 2011 — 1:16 PM UTC by Les Abromovitz, Columnist
One of the most famous movie quotes of all time came from Lauren Bacall in To Have and Have Not. In the 1944 movie, Bacall said to Humphrey Bogart, “You know how to whistle, don’t you, Steve? You just put your lips together and … blow.” In response to Bacall’s invitation, Bogart whistles.
It’s less romantic when a whistleblower triggers regulatory scrutiny of your advisory firm.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank legislation”) established a whistleblower program that enables the SEC to pay an award to individuals who voluntarily provide the Commission with original information about a violation of federal securities laws. On Nov. 3, 2010, the SEC voted unanimously to propose rules for conducting the whistleblower program.
Blowing the whistle can be lucrative
As you might expect, you have to do more than just pucker up and whistle to receive payment. To be considered for an award, the information provided by whistleblowers must lead to the successful enforcement by the SEC of a federal court or administrative action resulting in monetary sanctions totaling more than $1 million. If all of the conditions in the proposed rules are satisfied, a whistleblower may be entitled to 10-30% of the total monetary sanctions collected. The size of the reward depends on a number of factors, such as the extent of the assistance provided by the whistleblower and the significance of the information provided.
The whistleblower’s information must result in a new examination or investigation being opened, and it must significantly contribute to the success of a resulting enforcement action. In the alternative, the information has to be essential to the success of the action and would not have otherwise been obtained, even if the alleged misconduct was under investigation at the time it was submitted.
The proposed whistleblower program won’t permit payment to people owing a pre-existing legal or contractual obligation to report their information. The reward program will also exclude certain persons, such as compliance officers, unless the company does not provide the information to the SEC within a reasonable time frame or acts in bad faith.
Before the Dodd-Frank legislation, the SEC’s ability to reward whistleblowers was limited to insider trading cases. The amount awarded was capped at 10% of the penalties collected in the action.
The Dodd-Frank legislation also protects whistleblowers from retaliation. It is unlawful for any employer to “discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment.”
Although the proposed whistleblower rules have not been finalized, the SEC is moving forward. On Feb. 18, 2011, the SEC named Sean McKessy to oversee the new Whistleblower Office in the Division of Enforcement.
The implications of tips and complaints
In proposing its whistleblower program, SEC Chairman Mary L. Schapiro observed that the Commission receives thousands of tips each year. Although those tips are not necessarily the same as whistleblowing, the information might put a firm on the SEC’s radar screen. If a tip relates to your advisory firm and the allegations seem to be legitimate, the SEC might decide it’s time to take a closer look at your operation. Because of budgetary constraints, SEC and state securities regulators may rely more on tips and complaints to determine which RIAs to examine.
Even if you have nothing to hide, few RIAs welcome an unexpected visit by securities regulators. You will need to produce a wide range of documents in anticipation of the exam. Furthermore, the exam itself may take days or weeks. Afterwards, you may need to correct deficiencies uncovered by examiners.
A disgruntled employee or an unhappy client
A whistleblower complaint may be filed by an unhappy client or even a disgruntled employee. Therefore, RIAs would do well to have detailed policies and procedures in place for dealing with customer and employee complaints. Resolving these issues at the firm level reduces the risk that someone will take their complaint to regulators.
Pursuant to Rule 204A-1 under the Investment Advisers Act, each SEC registered investment adviser must adopt a code of ethics that, among other obligations, requires supervised persons to promptly report any violations to the RIA’s chief compliance officer or a designated person. According to the adopting release for Rule 204A-1, the SEC does not require RIAs to keep records of these “whistleblower reports.” The SEC decided that requiring these records “could have a chilling effect on employees’ willingness to report violations, particularly in smaller organizations.”
Even if a tip or complaint is frivolous, RIAs are better off when no one whistles to get the attention of securities regulators.
Les Abromovitz is a senior consultant with National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.
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